China needs new approach

25 November 2011

BEIJING: Brand owners may benefit from expanding their portfolios and encouraging shoppers to trade up in China, as the country's consumer market begins to mature in many areas.

Writing in the Harvard Business Review, Max Magni, head of McKinsey's consumer practice in Greater China, and Yuval Atsmon, a partner at its Shanghai office, stated a change was underway.

They argued that attracting first-time buyers, an audience that has driven much of the domestic growth in consumption, might now be less appealing given that items from mobile phones to refrigerators are increasingly "ubiquitous" in China's cities.

In evidence of this, while 20% of urban Chinese shoppers boosted their expenditure in 2010 because they could afford products for the first time, this figure stood at 5% in 2011.

"With so many products and services now within people's reach ... it's interesting to identify the new frontiers of growth," they said. "Sure, big-ticket products, such as cars, have plenty of headroom, but it's not clear if companies in other businesses can sustain double-digit growth rates."

One possible method of augmenting revenues is building categories: fabric conditioners and pure fruit juice, for example, have achieved a household penetration of around 50% in just a few years.

Similarly, the market for vitamin and mineral supplements, heralded by Amway's roll out of Nutrilite in the late 1990s, has today hit a value of $6.5bn.

Prioritising less affluent cities earmarked for growth could also be wise, as shown by the fact 15% of people from Chengdu and its environs began using personal care goods in the last year, versus 1% in the more advanced market of Hangzhou.

Attaining widespread distribution is equally key, with Master Kong, the food and beverage group, now boasting over 500 sales offices and 100 warehouses across the country.

McKinsey's research revealed 80% of shoppers who were aware of Master Kong's ready-to-drink tea had purchased the product, a conversion rate easily beating the category average of 55%.

In responding to the discovery that 85% of adults had tried drinking milk by 2005, Mengniu, the dairy group, adapted its slogan from "one cup of milk a day" to "three cups". It also launched new premium, breakfast and "goodnight" lines, all helping to triple sales by 2010.

"Growth in China will no longer come from a single front," Magni and Atsmon said. "Companies must sometimes recruit new consumers; at others, they must persuade existing consumers to trade up or buy more."

Data sourced from Harvard Business Review; additional content by Warc staff